March 23, 2023

DealBook: Congress Presses New York Fed for More Details on Rate-Rigging Scandal

Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee, wrote a letter  to the New York Fed on Monday.Jay Mallin/Bloomberg NewsRepresentative Randy Neugebauer, the chairman of the House Financial Services Subcommittee, wrote a letter  to the New York Fed on Monday.

Congress widened its inquiry into the interest-rate manipulation scandal, pressing the Federal Reserve Bank of New York to further disclose its knowledge of the multiyear scheme.

On Monday, the oversight panel of the House Financial Services Committee sent a letter to the New York Fed seeking volumes of records about the London interbank offer rate, or Libor, a measure of how much banks charge each other for loans. Lawmakers are demanding that the New York Fed detail its communications with employees from all 16 banks that help set the interest rate, which affects the trillions of dollars in mortgages and other loans.

The letter follows an Congressional request that the New York Fed turn over transcripts from phone calls its officials had with just one bank: Barclays.

In June, the British bank became the first to settle accusations that it tried to manipulate Libor for its own benefit. Authorities around the globe are investigating more than 10 other big banks for their role in rigging the interest rate.

The initial transcripts released this month showed that the New York Fed learned about wrongdoing at Barclays in 2008. That revelation called into question whether the New York Fed pursued the matter fully.

Libor Explained

“We know that we’re not posting um, an honest” rate, a Barclays employee told a New York Fed official in April 2008, according to transcripts. At the time, because high borrowing costs were a sign of poor health, banks were submitting artificially low rates to project a better image of their finances.

The transcript, among other documents, only fed the firestorm over what regulators might have known about the rate-rigging scandal. The New York Fed and other authorities are under scrutiny for failing to thwart the illegal activities that, at Barclays, continued to 2009.

“There are still many outstanding questions that merit further investigation,” Representative Randy Neugebauer, the chairman of the House Financial Services Subcommittee on Oversight and Investigations, wrote in the letter on Monday.

The latest request is likely to produce reams of memos and e-mails. The subcommittee is demanding “all communications and documents” between the New York Fed and the 16 banks over a five-year span, from 2007 to 2012. The New York Fed, which has until Sept. 1 to provide the documents, must also turn over its internal documents and any correspondence with authorities in the United States and abroad.

The New York Fed has defended its actions, saying it briefed regulators about the broad problems with Libor.

But lawmakers have questioned why the New York Fed, despite its awareness of misconduct at Barclays, did not refer the illegal acts to regulators or the Justice Department. Instead, the New York Fed circulated in June 2008 a plan to fix Libor, producing a six-point plan to revamp the rate-setting process.

“As you know, the role of government is to ensure that our markets are run with the highest standards of honesty, integrity and transparency,” Mr. Neugebauer wrote. “Therefore, any admission of market manipulation — regardless of the degree — should be swiftly and vigorously investigated.”

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DealBook: House Committee Subpoenas Corzine

Jon S. Corzine, the former chief of MF Global.Pool photo by Andrew HarrerJon S. Corzine, the former chief of MF Global.

The House Agriculture Committee voted on Friday to force Jon S. Corzine to appear at an upcoming hearing about the collapse of MF Global, the brokerage firm that he once ran.

The committee’s hearing, set for Thursday, will present the first public grilling of Mr. Corzine since MF Global filed for bankruptcy on Oct. 31. It also will give lawmakers a platform to delve into the demise of MF Global, where as much as $1.2 billion in customer money remains missing. Customers of the brokerage firm included farmers and agriculture companies, as well as hedge funds and other investors.

“We agree that his testimony is essential to fulfill our objectives on behalf of our constituents and to complete the hearing record,” the committee’s chairman, Frank Lucas, Republican of Oklahoma, said at a committee meeting.

The disappearance of the money has spawned a sprawling federal investigation into MF Global, with the Commodity Futures Trading Commission leading the search for the missing money and the Federal Bureau of Investigation examining a potential criminal case.

On Friday morning, the House committee voted unanimously to issue a subpoena to Mr. Corzine, who ran MF Global before he resigned on Nov. 4. He also faces requests to testify from two other Congressional panels.

Mr. Corzine has not been accused of any wrongdoing. A representative for Mr. Corzine declined to comment.

The hearing will be an awkward return to Capital Hill for Mr. Corzine, who spent five years in Washington as a Democratic Senator from New Jersey. He left his Senate seat to become the governor of New Jersey, a job he lost in 2009.

The House panel’s hearing will be quickly followed by two other Congressional committee hearings into MF Global. The Senate Agriculture Committee will hold its hearing on Dec. 13, and the oversight panel of the House Financial Services Committee will host a hearing on Dec. 15.

In a preview of the upcoming examinations, lawmakers on Thursday grilled MF Global’s regulators about the firm’s collapse. With the customer money still missing more than a month after the Chapter 11 filing, lawmakers noted, some futures industry customers are losing patience.

“MF Global has shattered the faith of customers in the futures markets,” Debbie Stabenow, a Michigan Democrat and the Senate Agriculture Committee’s chairwoman, said at the hearing.

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House Panel Plans to Question Rating Agencies Over Downgrade Threat to U.S.

A House Financial Services oversight panel on Wednesday will give lawmakers their first chance to ask senior executives at Standard Poor’s and Moody’s about their judgments in putting the government on notice that its top-flight credit rating is at risk.

The hearing had been called to discuss the impact of new financial regulations on the major rating agencies. But as the possibility of a credit downgrade becomes increasingly likely, representatives from both political parties are expected to take a closer look at the record of those issuing the reviews of United States government debt.

Representative Randy Neugebauer, a Texas Republican who leads the Financial Services Oversight Subcommittee, said he believed the agencies were acting properly to raise questions about the nation’s debt problem. Still, he added, the financial crisis showed that the rating agencies did not always get it right.

“A lot of folks feel the agencies failed,” he said. “Their credibility is somewhat in question.”

Representative Barney Frank, the ranking member of the House Financial Services Committee, who is a Massachusetts Democrat, said he believed the rating agencies had made flawed assessments on ratings of state and municipal debt over the years. Now, he said, he thinks they may be misjudging Congress’s political will to rein in the deficit.

“I don’t think that in judging how the political system is going to respond, going forward, that they have any credibility,” he said. “They are terrible at that.”

Wednesday’s hearing will be the latest act in a week of political drama over an agreement to raise the debt ceiling and lower the federal deficit. Even as Democrat and Republicans work on competing plans to get the nation’s financial house in order, the judgments of the major credit rating agencies hang over any deal. Moody’s, Standard Poor’s and Fitch Ratings have all warned that they might lower the American credit rating. S. P. has gone a step further, suggesting that the uncertain political climate could lead it to take action by mid-October even with an agreement to cut the deficit.

S. P. has indicated that the Obama administration and the Congress will need a “credible plan” to cut the deficit by $4 trillion to keep its top rating.

Few believe that such a plan is now possible. Critics of the rating agencies charge that they are inserting themselves in a highly charged political debate.

“For them to weigh in with such specificity of what needs to happen seems to be outside their mission and charter,” said Joshua Rosner, a managing director at Graham Fisher Company, a research firm. “It feels much more like a rating agency consulting business than a ratings business.”

Ratings can be useful in helping investors evaluate the performance of complex and lightly traded securities. But, ever since the financial crisis, the ratings agencies’ own track record has come under attack.

After the mortgage collapse, critics charged that the agencies gave sterling ratings to complex securities based on absurdly optimistic models, only to later watch them falter. They also pointed to the agencies’ unusual compensation structure, in which issuers pay for the ratings of corporate bonds. Critics likened that arrangement to a food critic who is paid by the restaurants he reviews. A Congressional panel examining the causes of the crisis called the ratings agencies “essential cogs in the wheel of financial destruction.”

The agencies’ record on sovereign ratings has been better, but European politicians found them to be useful whipping boys.

Now, Washington is registering its complaints. Within the Obama administration, officials are frustrated with what they see as the rating agencies — especially S. P. — moving the financial goalposts. Last October, an S. P. commentary suggested that the American government would have three to five years to get its fiscal house in order. By April, when the ratings agency changed its credit outlook on the United States to negative, it suggested that the government needed a plan in place by 2013.

Then, on July 14, S. P. warned that if the government did not agree to a deficit reduction package of about $4 trillion, it could be downgraded in the next 90 days.

The agency said on Tuesday that the changing timetables reflected the belief that if lawmakers in Washington could not reach a deal now, they were unlikely to do so in the future. 

“What’s changed is the political gridlock,” said David Beers, its global head of sovereign ratings, in an e-mail. “Even now, it’s an open question as to whether or when Congress and the administration can agree on fiscal measures that will stabilize the upward trajectory of the U.S. government debt burden.”

A spokesman for the rating agency added that it would refrain from commenting on the “many varying proposals” that had arisen in the current debate.

Meanwhile, there is the topic that the hearing was originally called to address. As part of the Dodd-Frank Act, lawmakers pushed for new rules that stopped requiring the use of ratings, forcing investors to do their own analysis instead. But banks and their regulators have fiercely resisted the rules, saying that putting that rule into effect is difficult.

On Monday, for example, the Federal Reserve identified 46 instances in its bank regulation that required investors to rely on credit ratings, but it did not map out how it would adapt those rules so that ratings were no longer necessary. The Securities and Exchange Commission also proposed Tuesday that mortgage bond and other issuers make certain certifications in an effort to reduce investors’ reliance on ratings.

Lawmakers said they planned to question ratings agency officials, financial regulators and other experts on efforts to de-emphasize the importance of credit ratings in the year since the Dodd-Frank rules were passed.

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